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With interest rates rising, NRIs turn to fixed deposits

DUBAI — The steady increase in interest rates in India is making bank deposits a popular investment option among the Gulf-based non-resident Indians.

Leading Indian banks have revised their interest rates upwards on NRE and FCNR (B) deposits recently. For NRE term deposits of a maturity period of one year to less than two years and two years to less than three years, the rates offered by different banks range from 6.5 per cent to 6.7 per cent. For dollar-denominated FCNR (B) deposits, for a tenure of one year to less than three years, the current offered rate is about 5.7 per cent. The average risk averse NRIs are flocking back to fixed deposit counters. “A 6.7 per cent risk free return is indeed a good option. Traditionally NRIs have kept more than 40 per cent of their savings in fixed deposits. Though an increasing number of NRIs now have equity, mutual funds and real estate in their portfolios, a minimum of 20 per cent is kept in FDs,” said the General Manager of a leading public sector bank.

Statistics from Reserve Bank of India shows, that even during the low interest environment, NRIs kept a substantial portion of their earnings in bank deposits. In December 2005, NRI deposits accounted for 28 per cent of India's outstanding external debt, while multilateral organisations formed 26.8 per cent of the total debt. During April-February '05-06, there was a net inflow of $1.9 billion in terms of bank deposits. Clearly, NRIs seem quite upbeat on the India story with the compounded annual growth of NRI deposits being more than 20 per cent since 2001-02, compared to a CAGR of 4 per cent of the outstanding external debt.

During the past few years NRIs have emerged India's biggest source, surpassing traditional sources such as multilateral and bilateral foreign agencies. Throughout the 1990s and the early part of this millennium, multilateral organisations such as the World Bank agencies formed a major chunk of India's outstanding external debt.

Over the last few years, NRE deposits were hugely popular investment options with NRIs. Not only did the deposits earn substantial interests, but are fully repatriable. Since they are rupee denominated, they have the opportunity to gain on conversion to dollar in the case of dollar depreciation against the rupee. Due to a swelling forex reserve, NRE deposits fell out of favour with the central bank in early 2004, which gradually cut down rates. In July 2004, the central bank capped the rates on these term deposits to 250 basis points above libor and over time this has been reduced further to match libor itself.

However, the rising external and domestic interest rates is breathing new life into the fixed deposit market.

Mortgage rates headed north

DUBAI — The rising interest rates is clearly making those with substantial bank balances a happy lot. But those who have borrowed long term on floating rates have enough reasons to worry. The mortgage rates had risen more than 4 per cent during the past two years and are inclined further north.

The spread between the fixed and the floating rates offered by HDFC, a leading home finance provider, has now widened to 1.5 per cent from last year. The company is now charging 9 per cent on floating rate loans above Rs500,000 and 10.5 per cent on fixed rate loans. ICICI Bank, another leading player also has similar spreads and rates. The higher the spread, the greater the chance of rates going up in future. The signals are that lenders would hike rates in the near future.

The widening of spreads between variable and fixed rate mortgage has made the choice tough for home loan seekers. As interest rates seen heading upwards, those who opt for a floating rate are taking up uncertain liability. On the other hand, the higher margin on fixed rate makes the monthly instalment higher right from the beginning of the loan. In the case of NRIs, floating rate is more preferred because of the shorter terms of loans. The average tenure of loans among the Gulf NRIs is about 5 to 7 years and pre-payment rate is higher. Many opt to pre-pay as they upgrade their homes and in some cases opt to liquidate their investments.